movement with it's sit in and stands in and neal ins and mass marches and all the other elements that enter the struggle have been patterned a great deal afghandy. >> for the complete american history weekend schedule go to cspan.org. >> aimed at creating a private flood insurance market. the deal would expand coverage beyond the current government backed national flood insurance program. the house subcommittee hearing is just over 2 hours. >> so let's call the committee to order.

authorized to declare a recess of the community at any time. this hearing is entitled how to create a more robust marketplace. before we begin today i'd like to thank the witnesses for appearing today and look forward to your testimony and i now recognize myself to give a opening statement. >> flooding devastated large areas of my home state of missouri and tragically causing millions of dollars in damage. we have seen similar situations from south carolina to southern california. unfortunately these are not isolated incidents. flooding is the most prevalent natural disaster in the united states. as communities in missouri and across the nation begin to put their lives back together it's fitting that this subcommittee continue to exam flood insurance and the construct of the national flood insurance program. yesterday they haeld a hearing to discuss it and last week icon convened a round table discussion on flood mapping. what is evident is total

reliance on insurance coverage is inadequate. one of the first steps is to access market based flood insurance policies. hr 2901 the modernization act of 2014 would allow greater consumer choice and private market participation. it does so under the close supervision and we worked in an overwhelmed bipartisan fashion to protect. they'll have greater flexibility in their choice of pollties providing competition and will also promote competition in markets previously underserved. i owe it to my constituents in

missouri and all to create a program for flood insurance that is stable, accessible and cost effective. and ciab and national association of professional insurance agents and round table and the smarter safer coalition and financial association of realtors and the national multifamily housing council. as you can see there's wide support across the energy spectrum. this alternative to our present system. chair now recognizes the ranking member of the subcommittee with an opening statement for five minut minutes. >> thank you again. let me thank you as i did yesterday for the very proactive step you have taken toward

dealing with the issue of insurance before it becomes caught up in a critical year where we're not going to have a lot of work days and i think it is appropriate for us to continue as you have already begun hearing issues that relate to the flood insurance and we discussed yesterday i think rather broadly the nfip program and we highlighted areas where there is room for improvement and discussing ways it could be reauthorized. this is our second hearing on flood insurance and today we'll be discussing the role of private insurance and the flood insurance market which is a significant issue and a significant concern and we dealt

with it yesterday but i think the key to the whole issue is whether or not the private sector is interested in and becoming involved in this program we attempted this over the year. it was created in 1968 to provide flood coverage for consumers unable to get coverage from the very limited private market it's responsible for developing flood maps and promoting activities. one of the things that i think we all have come to see is that flooding can occur anywhere i grew up in the dallas area on toward until you get to amarillo. it's just flat. around summer in this flatland

there were all kinds of understooding and we know that it can and does occur everywhere and has a devastating impact in our community but when the major events occur like katrina it decimates any private participation and the government has had to do a lot of backstopping for sandy and katrina and as we began to discuss reauthorization of the program we have to assure that products remain affordable and available. must also focus on the importance of obtaining accuracy in our mapping which is a really big issue in the rural part of

the district. appetite for pry rat insurers to reenter the flood market has grown. so i look forward in discussing the way the project and flood insurance can grow. i yield back the balance of my time. >> with that the chair recognizes the gentleman from florida mr. ross for an opening statement. >> thank you for holding this hearing about an issue for which i am dedicated. that's providing more affordable consumer options in the marketplace. i would also like to thank for their testimony today and representative patrick murphy for joining me today and the current flood government flood insurance model known as the national flood insurance program. yesterday we held our first as a

series of hearings to examine the problem with the federal program and explore solutions that benefit homeowners. americans across the country would benefit from more choices when it comes to flood insurance policies and private competition will lead to greater innovation and more affordable policies for consumers the flood insurance modernization act. this will remove the unnecessary regulatory barriers hindering flood insurance options. as a primary regulator i'm proud. it will encourage the expansion

of an option for homeowners. i yield back. >> gentleman yields back. with that we'll begin our testimony and we become all of the panel lists today. we'll start with teresa miller on behalf of the national association of insurance commissioners. mr. steve bradshaw. executive vice president standard mortgage corporation. mr. brad kelly, executive director of the national association of professional surplus lines offices and mr. bernie, director of economic justice. each will be recognized to give a presentation of testimony. without objection your statement will be made part of the record. just on the lighting system, green says go. when you get to yellow you have one minute to wrap up and when it says red, i'm the one that has the last word so we'll hopefully stop there shortly there after. with that i want to.

>> it's my pleasure to welcome commissioner miller today. she was confirmed in june of last year and in that capacity she oversees the fifth largest insurance market in the country and the 14th largest in the world in terms of premium volume. this is a significant and challenging responsibility in our large and diverse statement. providing advice on issues such as automobile afford blt and international insurance developments. even if history of flooding and on going concerns about the impact of flood insurance

policies on its citizens i expect them to provide welcomed insight into the future of nfip and impactful reformers for the committee to consider. thank you for coming. i yield back. >> facilitating increased private sector involvement in the sale of flood insurance can help promote consumer choice and spur competition. it will also provide homeowners necessary coverage often at greatly reduced costs in pennsylvania private carriers are willing to offer comparable coverage at substantially lower costs than nfip. in one instance a property owner would have paid a $7,500 annual

premium but found private coverage for over $1,400. another homeowner was quoted a $6,000 an wrul premium but found a private policy for $900 private flood is being developed and offered first by the insurers. they insure unique or otherwise difficult to underwrite risks that the admitted market is initially reluctant to insure we have authority to assure that they're well protected. these include capital, surplus and eligibility requirements on carriers as well as the ability to hold the insurer and the broker responsible for any misconduct. as the private flood insurance market grows and more companies offer coverage, our regulation will continue to evolve to meet

the size and the breath of the market as well as the needs of consumers however more can be done providing consumers more choices and affordable coverage one objective was to create private opportunities as an alternative to the nfip. unfortunately the definition of and the regulatory environment surrounding private flood insurance is at odds with this objective. and related to the financial solvency, strength or claims ability from private insurance

companies for which they will accept private flood insurance. this is highly problematic as banking and housing regulators neither have the expertise nor experience to regulate the companies and markets they're different than insurance competitives and fostering environment and it's inappropriate for them to have the authority to substitute their judgment for those charged under the law with regulating insurance products and protecting policy holders. >> it includes important language that they have the same authority and discretion to regulate private flood as other similar insurance products and markets. we very much appreciate these clarifications as they're critical for support for this legislation. another impetment for entrance into the market is the vague

definition of private flood insurance. in order for a private market to evolve insurers need flexibility to taylor insurance products to meet consumer needs. this is despite being able to offer greater limits at a more affordable price. it provides a clear definition of private flood by clarifying that state insurance laws solely govern over the transaction. it will insure that state insurance regulators have the flexibility to approve private flood insurance coverage that's responsive to the needs of their states and constituents while complying with regulatory

requiremen requirements. they support efforts to help consumers with access to additional options where private flood insurance and more affordable prices. we appreciate leadership on hr 2901 and look forward to continuing to move together as the bill moves forward. i appreciate the opportunity to be here. >> thank you. you're recognized for five minutes. >> good morning, chairman. and members of the subcommittee my name is steve bradshaw and i appreciate the opportunity to testify today on behalf of the mortgage bankers association. i'm currently executive vice president of standard mortgage corporation and lender and servicer headquatered in new orleans, louisiana. it was founded in 1925 and currently services 28,000 residential mortgage loans

throughout the southeast august marched the 10th anniversary of one of the most significant flood events in u.s. history. we experienced the massive devastation firsthand. 3500 of our servicing customers sustained significant flood damage to their homes and on a more personal note nearly 2-thirds of our staff lost their homes. as a result of hurricane katrina and two other significant storms in the fall of 2005 more than 1 million housing units were damaged across five states. there's no doubt that the national flood insurance program was a key component to the gulf coast recovery just as it has been for other kmunlcommunities across the country that sustained major flooding or flooding today but there's also no doubt that the nfip needs to be reformed. the program is now 23 billion in debt and simply not sustainable as it is. the federal government cannot and should not bear the full

burden of post disaster recovery. congress recognized when it passed that private sector flood insurance must be developed in order to allow a stable, sustainable and affordable market. expanding flood insurance options will make it easier for more homeowners to obtain flood insurance. it will lower cost and increase the number of properties that are insured. in other words expanding the pool. for example many homes were not located in the special flood hazard area. as a result mortgage servicers like us reliable for the cost when those homes were wiped out. it can also serve to shift some of the burden and not all of the burden but some of the burden of

post disaster recovery away from the federal government and to the private sector. we support the act. the bill provides two important improvements to the nfip. first the bill clarifies what constitutes an acceptable private flood insurance policy and provide a clear definition of private flood insurance and this will satisfy the mandatory purchase requirement. second, hr 2901 addresses lenders concerns regarding continuous coverage requirements. under current law it's unclear whether someone previously covered under an nfip policy that moves to a private sector policy would be eligible to return to the nfip policy at the previous rate. we're pleased they eliminate the

disincentive for consumers to choose a private policy. it does so by clarifying that it satisfies the continuous coverage requirement. in summary, nba supports hr 2901 as a simple way to encourage the growth of competitive private flood insurance market increased market will expand available insurance options for borrowers, lower cost for consumers an reduce exposure to flood losses overtime. we're especially grateful for the leadership shown by the representative dennis ross and patrick murphy on this legislation and urge the subcommittee to approve it. thank you again for the opportunity to testify today i look forward to any questions you may have. >> thank you mr. bradshaw. mr. kelly. recognized for five minutes good

morning. my name is brady kelly. i'm based in kansas city missouri. thank you for inviting me here today to testify on 2901. it's a $42 billion market and underwrite a very high proportion of that. our market often referred to as the nonadmitted market exists to provide insurance coverage to non-standard and complex risks and provide cover for risks. it's the state's approach to regulating that market that allows it to work as this supplement. it's part and parcel to its effective operation and regulation. consider for example the impact of sats trofcatastrophic lossese certain lines of business. exhibit one tries to illustrate

that. market responses by measuring the rates at which surplus lines premium shifted up and down overtime in relation to total u.s. property casualty premium. you see the north ridge earthquake, 911, hurricanes in 2005. they're all followed by clear spikes in surplus line premium. spikes that exceed the growth of the overall property casualty market and reverse being true in years following that where they're lower and the standard market readjusts. they will be left without coverage for commercial risks or personal assets. the same fundamentals apply in flood insurance. they will look to our market for the solution. it's important to find out that this is not new. property exposures may exceed the limit within the nfip on a

residential property or the half million dollar limit on a commercial property. homeowners may want replacement coverage rather than actual cash value for their property. they might want to ensure additional structures and list other properties on one policy. might need additional living expense and or basement interrupti interruption. written testimony includes facts and figures about the size of the flood insurance market and why they represent a small proportion of the overall market. this is why we strongly support hr 2901. the 2012 law created uncertainty for lenders and consumers. specifically lenders became

uncertain about accepting policies in light of the laws requirements and because it authorized federal banking and housing regulators to apply their own requirements on private insurance companies. no regulation versus been developed since that time and it's prolonging this uncertainty. uncertainty is the problem but hr 2901 is the fix. it ensures our markets continued role in solviing unique and complex flood rist ks in addition it maintains the authority in regulating private flood insurance because of their experience and success in regulating the business we obviously strongly support that. we also provided written testimony describing how the states regulate the market and commissioner miller has already done a thorough job of describing that. let me reiterate the importance and degree of each state's authority over the insurance

company and surplus lines broker in a surplus lines transaction. as a result it illustrates an exemplary record for our market. it's included as another exhibit in the testimony. hr 29 will solve the problems and concerns shared by the insurance and banking industr s industries. legislatures on both sides of the aisle will expand and improve going forward. the witnesses over the last couple of days agree with that. we believe it's a positive step in that direction because it enables the private market to develop and it allows the nfip to focus on the properties with repettive losses in their goal of loss mitigation and prevention. we look forward to working with

you as the bill moves forward. >> thank you. members of the sib subcommittee, thank you for the invitation to speak to you today. availability and affordability is a critical issue. have worked on these issues for over 20 years as an insurance regulator and consulting economist and consumer advocate. >> your invitation asks whether it represents an ideal model for the effective protection of residential and commercial property owners from damaging relating to flooding. the answer to that question is no for a number of reasons. the primary problem is the multiple and conflicting goals that congress tasked the program with and the restraints and requirements placed on the program. the starting point for congress and the federal government should be a focus that federal expenditures promote more resilient and sustainable mehom

and infrastructures. this is a clear goal that any proposal can be evaluated by asking does this change promote resiliency and sustainability or not? the reason why resiliency and sustainability must be the overarching goal is that there's no insurance mechanism public, private, or combo that will be able to finance increasingly frequent and severe flooding. a focus means federal expenditures as investments today to replace disaster relief expenditures tomorrow. >> there's a great opportunity for greater reliance to provide flood insurance but hr 2091 is not the approach to accomplish this or make it more financially sound or achieve greater resiliency or sustainability. the best approach is to require that flood be covered in standard residential and commercial property insurance policies and subject to the same state based regulatory frame

work that exists for home owners and commercial property insurance today. four actions needed by 2017. get the nfip out of the business of being a flood insurance company by requiring that residential and commercial insurance policies cover the flood. it turns flood back to the states where all of the property insurance products and markets are regulated and back to private insurers that have the capability to provide more comprehensively and efficiently than the federal government. two, transition from a direct provider of insurance to a reinsurer utilizing a successful model of the terrorism risk insurance program. three address the afford blt problem of flood insurance with federal, state and local assistance outside of the insurance system. no subsidies insurance pricing with an overwhelming emphasis on assistance for loss mitigation.

it's urged from efforts of longer term reform and responses to current crises. hr 2091 is in response to a current issue. rules regarding private flood insurance and see an opportunity to pick off nfip policies mispriced due to nfip rating practices. it will not address the longer term problems and will not promote private market participation and will create bigger problems in the future when a flood event occurs. it attempts to encourage private flood by including surplus lines insurance by residential properties and eliminating federal oversight. removing current consumer protection requirements for private flood and the authority of federal agencies to

implemented the requirements and the authority of government sponsored enterprises to establish standards for the claims paying ability of insurers which they already do now for standard insurance. surplus lines can be insurers i ways. it's the filing and approval of policy forms and rates, subject to the state's consumer protection laws regarding unfair trade practices and comp gattis and importantly participate in the state guarentee fund which pays claims in the event the admitted insurers become insolvent. in contrast they're not licensed by state insurance departments. rather the statement department regulates agents authorized to place coverage with a surplus line insurer on a list of acceptable insurers. policy forms and rates are not subject to regulatory oversight and they do not participate in

state guarentee funds. i understand the theory is that they're not willing but it would be if certain requirements such as comprability were released. i've seen no evidence to remotely suggest that admitted carriers will do as suggested. i've seen them write business and admitted insurers would have written and i've seen personalized business migrate from the admitted market to surplus lines when permitted to do so to take advantage of consumer protection requirements. the actual result of these changes will be for surplus lines insurers to cherry pick policies overpriced due to the nfip's broad rating scheme and reserves. while the surplus lines insurers take the low risk policies the nfip will become more financially vulnerable as the premium revenue will decline far

faster than risk exposure. hr 2091 will not only create financial problems for the nfip in the future -- >> can you wrap this up quickly? we're over. >> when a floor occurs. since the states don't regulate policy firms they can contain exclusions a regulator would never approve in a policy. flood insurance markets in particular are not competitive to unleashing unregulated insurers on vulnerable insurers without meaningful state oversight is a recipe for disaster. thank you. >> thank you. miss miller. you made a comment awhile ago with regards to the gse's being able to regulate insurance. versus the private market which would have to be overseen -- can you explain what you're talking about there a little bit and --

because i think it's a key point of what we're looking at this morning with regards to regulatory oversight. >> absolutely. thank you, chairman. banking and housing regulators are seemingly fundamentally different than insurance consumer protection and promoting competitive insurance markets: our view is they're ill suited to regulate insurance and it's inappropriate for them to be given the authority to substitute their judgment for those of us charged under the law with regulating insurance. state regulators have 140 years regulating and supervising the business of insurance and protecting policy holders and really balancing the availability of coverage with solvency. i think to put it very bluntly, banking and -- banking regulators, they don't have a man date of consumer protection

and state regulators, that's what we do. that is our charge. >> basically you're saying that the gses are your authority to be able to oversee and qualify the different policies of the private sector. is that what you're just saying? >> that's correct. >> okay. thank you. >> mr. bradshaw, you talked about with regards to some of the folks not covered by flood insurance, especially in katrina and you sort of eluded to the fact that there's concern there because flood effects a lot of people beyond the flood plane. so would you consider or are you eluding to the fact that you would like to see everybody required to have this or that the lenders have more leeway in requiring that people have flood insurance or did i misunderstand what you just said?

>> with regards to requiring everyone to have flood insurance the answer to that is no. that's not the position that's standard mortgage. it's certainly not the position of the mortgage bankers association. with regards to expanding the options for insurance coverage to be available, we, standard mortgage is very interested in that. during katrina there were a number of people that were flooded. due to the nature of insurance as an example is that if the -- if someone floods, if they're not in a flood zone, so there's no flood insurance, and if they then abandon their home then it's up to standard mortgage to repair the home in order to file

the claim against fha. so that puts us in the business of insuring fha. so we believe with a new type of program that could be developed by private insurers that other people may be interested in obtaining insurance even when outside the zone. >> thank you. mr. kelly. he made a statement a moment agatha caught my attention, that they don't belong to the guaranteed association of states. that's a very good point to the standpoint that surplus lines are where you look to be able to provide flood insurance. is that the case mr. kelly? >> it is the case. they are not backed by guaranteed funds but there's

good reason for that. i mean, if you look at the type of coverages written in the surplus lines market they're often not coverages that would fall under the general limits of the guaranteed funds that would exist for the standard market. you also have the report that shows an incredible solvency record for the surplus lines market. 11 years of no financial impairments compared to 207 impairments in the standard market over the same time period. look at the ratings of surplus lines carriers. they're all in the excellent to goods category compared to the standard side that aren't quite as good. so we tend to believe that coverage is typically inadequate for the size and limits of commercial policies covered by surplus lines carriers. we believe they don't incentivize strong corporate financial operations and it would add an unnecessary burden on the consumer given the

financial strength of the industry. >> thank you. my time has expired. >> thank you mr. chairman. yesterday i asked our witnesses if any of them believed we needed to end the nfip and there were no hands raised so i'm interested in whether this panel sees it the same way. any of you that believe we need to eliminate the nfip? just raise your hands. >> yes. as a direct provider of insurance and transition it to a reinsurer along the model of the terrorism risk insurance program because the private market is in a much better position to

deliver a coverage of flood in the standard homeowners and commercial property insurance policies than the nfip with a separate flood insurance program. >> but wouldn't rate bs higher for consumers than they are right now for the nfip. >> no, certainly for some but for the vast majority of consumers the rates would be less because the private market could deliver the coverage of flood far more efficiently. number two you eliminate a lot of settlement costs because you no longer have an insurance company and the nfip trying to settle a claim and deciding who is responsible for it. we saw problems with that after hurricane katrina which is whether the insurers who were responsible for settling the claims were trying to say is it

a claim that's when we coverage of flood coverage. so there's a lot of reasons why the private market could introduce efficiencies that the nfip couldn't so the actual coverage would be less and there's still the issue that for some consumers it's unaffordable. that still has to be addressed the same way it does for the nfip. >> do you agree and do you think that we would actually have consumers who would pay the full risk rate in substantial numbers enough to make the program work? >> sorry. i don't agree. we certainly agree it needs to be reformed. and the note they made about

subsidized properties counting for the result in the market. 1% of all nfip policies account for 30%. so i think we have to face it there. that 1% category of property, no one is attracted in insuring those properties and to think that you could come up with a sound rate that covers the risk of that property i can't imagine the consumer having the ability to afford that. we believe there is the need to service some level of backstop but we think you can focus it down on that category of risk. >> so a hybrid? >> maybe: 2901 is going to shift as much business as possible to the private industry. but let's face it. private industry, they're going to have trouble insuring that 1% category as well without a reasonable rate. so if you focus on that 1%

category and on their mission of mitigating flood losses and preventing flood losses that in our opinion is a better focus of a reformed nfip. >> so do you think that if shifting exposure to the private sector is going to be just too much for them to bear, we tried this before. so, you know, we're talking about shifting more and more exposure to the private sector. do you think that would run away private sector participation or would they be jumping for joy. >> we don't know what the private sector is going to do because they're not in that business on a large role today so it's something to us that's worth trying. of course in louisiana we have a high concentration of risk.

we're very eager to have as many choices to expand home ownership and provide an affordable option. and to me there may be something akined to the relationship we have with the fha and thrifts and everybody it shall. >> that's bad for my colleagues. so use another -- no, inside. go ahead. >> pardon me for going off. the -- we're interested in expanding options. we're interested in seeing flexibility for the consumer. >> thank you, i'll yield back. >> that goes to the gentleman from mexico. >> thank you mr. chairman. appreciate your testimony.

thanks. your testimony is clear and precise. you recommend that more flexibility is needed could you describe that a little bit? flush that out a little bit nor? what would it look like? >> so i think what we're looki for is a clear definition of private flood insurance. that's been one of the biggest difficulties with the biggest water bill is that the definition is just not very clear and it's created. >> if we were to ask you would you have a sentence that would clarify that? >> i think that's what it does. it provides that. >> you think it completely does that. >> right. >> i needed reassurance. my friend sometimes we have to brand him to make sure and mr.

kelly, your testimony seems to hint that there's not much reason for a private market but that's in contrast to miss millers. she gave three examples and if three people can get an insurance it's almost out there for everybody. do you not find examples of that or is this something specific to her state. >> i think there are opportunities. what we have to two back and reiterate is its not the market of first resort. it's a market that exists to supplement what the standard market is unwilling to underwrite. they're not approved to write it. >> but you heard her examples and they went out and got it and got it cheaper. not knowing a thing about

insurance except that i pay it once in awhile but not knowing much more than that it's confusing and that's all i'm trying to solve. i'm not trying to pick at you or anything like that. so you don't find the private market as viable as what she does. that's all i want to understand. >> i am confusing you. i don't mean to suggest that. her examples are good ones and there was an example given by a member here. i think it was a property in florida where part of the proper city in the flood zone but the structure itself is way up on the hill and is never going to see water. >> the fact that our markets can come in and underwrite that market even though it's classified a specific way we can say we know that structure is never going to flood. >> so that gives me the impression that it's a specialty market for a special circumstance and miss miller again is that the case? that these examples weren't just

people going out and shopping off the shelf? these were examples where somebody specifically went and said we'll insure that? that's pretty easy and not like the rest of the flood or was it a broader market? that's all i'm trying to assess. >> it's a good question. we're starting to see increased interests but they're examples my department is aware of. this is a limited market. i'd like to see if we can grow it and make sure that consumers know the option is there. >> many of us would like to see the same thing. so she is talking about making sure that there's viability. so mr. kelly has on page nine of his report and i'm sure you dissected it as well as i did. so he has the rating agencies. if you took time to watch the movie the big short you see -- and if you watched the

circumstances play out they had all the rating agencies and they were rigging the game. in your experience would that tell us that it's going to be adequate? we just haven't found it out yet? but number two, this whole idea that somehow the bigger waters gives the gse somehow responsibility for financial regulation of insurance companies is a real

mischaracterization. saying that they can determine the claims paying ability means that they can require that the insurer have a certain credit rating of say a best rating of b or more. so the bigger waters doesn't give more regulatory authority. it says you don't have to take any insurance policy that comes your way. you can require insurance policy with an insurer that demonstrated a claims paying ability by a credit rating or agency rating of b or more or something along those lines. that's why it's important to keep that in bigger waters. >> thanks. appreciate it. yield back mr. chairman. >> with that we go to the lady from california. miss waters. >> thank you very much for holding this hearing. these hearings are very important because we are dealing with a rather complicated issue

of how to have a national flood insurance program that serves our public well. let me apologize to everybody for bigger waters. i have been apologizing for many months and helping everybody to understand the unintended consequences and we tried to straighten that out with the bill we passed that helped to reduce the cost of the premiums to our consumers estupinan but i want you to know that i'm very interested in whether or not we can do the best job for our constituents and i have been working with mr. murphy and mr.

ross and i do commend them for the attempt that they have made to try and this have a bipartisan issue. this bill that we are discussing today, 2901 but i recognize there are some concerns and i think that you have identified some of the same concerns but i want to know do you think it's possible to have this private, more private participation and involvement in the ways that mr. ross and mr. murphy would have it and do you think we can work this out? >> absolutely. we can get more private market involvement and flood insurance and with respect i don't think that hr 2091 is the way to go with that. and one of the problems with the nfip is the various and conflicting requirements.

make insurance affordable but not only have premiums that are sufficient to pay claims but pay back all of the claims in the past that were far in excess of the revenues. so when you have those conflicting things, you know, how do you address that? so what would happen with hr 2091 is that the surplus lines insurers would cherry pick certain policies. right now the nfip looks at a special understood hazard area and has 30 different levels of risk. with one being the highest elevation and the lowest risk and 30 being the lowest elevation and the highest risk. they then average the claim costs for that for everyone in that. surplus lines insurers are going to come in and pick off everyone from 1 to 14 leaving the nfip with everyone at 15 to 30 with the result that the nfip is stuck with the worst and most risky claims but no more revenue

per se to deal with that. so you'll create more problems down the road. the proposal that we put forth fully gives the private market not only the responsibility but the tools to price the product and utilize all of their means, whether that's catastrophe modeling, reinsurance, all of the pricing tools that they can to get flood insurance right. >> so would you just briefly describe your proposal. >> the proposal is that congress or the states require that flood be part of the homeowners and commercial property insurance policy. so these are private insurers already providing property insurance so you're just asking them to add understood. so what that would mean is far more efficient delivery of the coverage of flood because you wouldn't have to have a second policy. you'd have all of the skills and tools of the private insurers

who access to catastrophe modelers to get the pricing right and all of the reinsurance and catastrophe bonds and all the alternative capital available to suppor that. then a mega reinsurer. that's been a successful model. not only would it deliver the cost of flood more efficiently but it would expand flood coverage. it would give consumers the coverage they expect at the time of an event. instead of surprising them with there's a flood and i'm not covered. more importantly how many times have we seen flood in areas that aren't special flood hazard areas and redpuce it down the

road. this is really the only long-term solution. >> if i may, mr. chairman, what you're indicating is mandatory insurance for everybody to participate. i agree, first of all, the debt that they attempted to address was impossible. we can never pay that down or take care of that so what would you say about, you know, constituents that would say i don't live in a flood zone. i'm not, i shouldn't be responsible for those people who decide they want to live in places that they know, where they know they're at risk. what would you say to a politician about that? >> the beauty of having the flood as part of the private market. private flood, the homeowners or the commercial property is

insurers peril. so for consumers who lived in areas that didn't have a high exposure to flood they'd pay little or next to nothing for it. for consumers who live in a high flood risk area they'd pay a lot more, but the private market would reflect these risks a lot more responsively than the nfip, because the nfip is required to go through this lengthy process with the flood maps. so imagine if that same process were required for wind coverage. the way homeowners insurance is sold today. that would be a disaster for providing wind coverage. so by turning this over to the market, everyone pays their fair share. instead of the system today, which is a bunch of hidden subsidies. taxpayers -- there are some taxpayers who live in area without much flood who end up paying for flood, because the federal government has lent $24 billion to an nfip program that

still isn't financially sound. so there are subsidies there not only from one set of nfip policyholders to others, but subsidies from taxpayers to other taxpayers. >> i need you to wrap it up. >> okay. so moving this to the private market you would introduce a lot more equity in the price of flood insurance, and you would make it a lot more transparent. thank you. >> thank you very much. i appreciate that, and i'm hopeful that you can work with us as we try and figure out what we are going to do to reform the national flood insurance program, and have some private involvement in it. thank you, mr. chairman. >> thank you. general lady's time expired. the chair now recognizes the gentleman from florida, mr. posy for five minutes. >> thank you, mr. chairman. again i'd like to express my appreciation for the chairman in holding these efforts to help us get ahead of this issue a little bit. the national flood insurance program currently $23 billion in debt, that's about the clearest

indication we can ever have that it's not working in its present form, and from the hearings that we've held so far, i'm encouraged that at least every member seems to be able to agree on that. at one time an ho3 was said to have been the broadest, most inclusive form of insurance ever written. ho3 standard homeowners insurance policy not only covered a lot of perils, such as fire and wind at one time, it had liability coverage in it, if your kid shot the neighbor with a bow and arrow, and theft provisi provision. some pretty broad, and i don't know if that's still the case. still it's considered to be the broadest, but the question i have is a historical one, if any of you could answer it, and that

is -- if flood was ever included in a standard property insurance policy before homeowners or otherwise? can any of you answer that question? >> not to my knowledge. >> i'm sorry. could you repeat the question? i didn't -- >> yeah. was the peril of flood ever before covered by, say, an ho3 policy in a standard homeowners insurance policy? was it ever covered? of course, the next question is, when did it cease to be covered? >> okay. so -- when basically congress created the nfip in 1968, and that's when private industry came forward and said, you know, we're not willing to cover flood, because the risk is concentrated in certain areas. we can't diversify it and we

have a hard time identifying the risk, because the flood maps are -- >> so at one time it was covered? >> yeah. >> okay. do they cover earthquakes in california? is that a standard cover? >> no. >> no. okay. what do you think would happen if there was a -- a small sentence added to legislation which said, if -- if you cover any property, insured, which has a mortgage insured by the federal government, you shall not exclude the peril of flood from the coverage? what do you think would happen? >> oh. well, i think what would happen is, it's that private insurers would start offering the coverage with peril of flood in their homeowners policies and if they didn't, then state residual

markets would be providing that. so, for example, in florida, just as right now, if a company isn't willing to write wind coverage, and the consumer would go to florida citizens. so if a company weren't willing to write flood, then in the policy, then the consumer would go to florida citizens. but the ability for companies to write flood today is completely different than it was 40, 45 years ago. companies have access to ka as it catastrophe models, access to destink risk and capital that didn't exist 45 years ago. so the opportunities are there. there just needs to be a nudge from the government to do so, and that nudge would be a requirement that they include it. >> i -- i'm not opposed to that concept for sure, but i must say that citizens put florida

taxpayers on the hook greater than any other risk ever known to the citizens of florida, citizens, had citizens had as broad a coverage free to '04, florida would be in as bad state detroit and that's not a clear tans have a government-owned insurance company be the largest in the state with never enough reserves when you live on a hurricane-pre hurricane-prone peninsula to cover innumerable losses. fortunately, you know, our states cannot just print more money and go into debt. they have to actually -- they have a constitutional requirement to balance their budget and can't pull the es

escapade that the federal government can. my time is expired. >> chair recognizes chairwoman from ohio for two minutes. >> thank you mr. chairman and to our witnesses today. first let me say that i support what waters said to look at a public/private operation and try to get through two quick questions. one to you, mr. birnbaum, and one to you, mr. bradshaw, as it relates to the national flood insurance program and privatization, to you mr. birnbaum, we've were certainly heard some interesting testimony here and i've had an opportunity to look through your written statements, and one of the concerns i have is the area of moving away from the national flood insurance program to privatization. so i'm concerned. i'm sure my colleagues on both sides of the aisle are

concerned, or should be concerned, and i know fema is also concerned when you look at the $23 billion in debt, and so i guess my question is -- if we talk about, as you stated, mr. birnbaum, that we move away from privatization in -- and move away from the way it is now to privatization, what happens to the $23 billion in debt? because certainly one would not expect fema or the taxpayers to be left holding the bag, and when you recommend that the national flood insurance program get out of the business of being flood insurance provider and do its transition, i don't think i saw anywhere in there where you addressed what happens to the $23 billion in debt? did i miss that? or is there something there that you can share with us? >> no. i -- the short answer to your

question is that the same thing is going to happen, would happen as is going to happen right now. which is, taxpayers are on the hook for the $23 billion. right now there's a belief the nfip is going to generate funds in the future sufficient to pay back that $23 billion. well, given that you're continuing to allow or require the nfip to subsidize rates and with hr-2191 you're going to put the nfip being more financially vulnerable will not only not pay back the $23 billion you're going to create an even larger richlt for the nfip to borrow from treasury. so the answer to the question is, that $23 billion is there. cut your losses and move to a system of sustainability. >> when you say cut your losses, that makes it go away? >> it doesn't make it go away, but congress is, you know, you're going to have -- congress is going to have to pay that $23

billion, because there's no way that the nfip is going to be able to repay back over time even under the current requirements, let alone under the requirements of hr-2091. >> so -- i guess what i'm hearing, and certainly you're the expert, is that if congress is going to have to pay it for it to be privatized and congress is going to have to pay it to leave it the way it is, where's the in between of public and private in sharing in that cost? >> well, by moving to flood as part of the standard homeowners and commercial property insur insuran insurance, what happens is the federal government stops being on the hook for flood insurance losses. it means that the private market is responsible for accepting the exposures, pricing them appropriately, and paying in the claims. the bleeding stops. and that's what's necessary at this point in time.

so you accomplish several things by putting it with the private-with the private market along the proposal we've made. you not only stop the hemorrhaging of federal money, but -- number one -- but number two, you get better pricing. you get more comprehensive coverage and you get better opportunities for loss mitigation. you get private insurers now incentivized to get involved in lost mitigation for flood in a way they currently have no interest in doing now. >> for the same of time i'm going to move on quickly to you, mr. bradshaw. can you tell me the value of the flood plain mats as it benefits lower and middle income americans, and first-time home buyers? >> well, certainly the value of the flood plan maps are significantly improved today as compared when i started in the business in 1971, when we

received this big box, roll of maps, and our objective was, or our assignment was to locate all the properties on the map. so the -- the digitization of the maps helped to improve significantly, we believe, the underwriting of the flood insurance risk. all that being said, there's several places in the, with the mapping that are incorrect, and that the private market will be able to identify those from using different approaches, and then the hopefully is, that that provides more choices's that provides more opportunities for our consumers to afford the, the flood insurance, particularly the lower income and the new home buyer. >> okay. thank you. >> thank you. general lady's time expired. i now it recognize myself for five minutes. ms. miller, you spoke in your testimony about some of the

obstacles or the bigger waters preventing you from being able to authorize private flood insurance in the state of pennsylvania. are you seeing a, an influx of interest from the private market to want to write flood insurance in pennsylvania? >> chairman, we're not seeing an influx of interest. it's still a very limited market. we're seeing some increased interest. we're seeing more surplus lines policies, but still, it's a very limited market. >> and if this hr-2901 were to pass, do you think that would change things and allow for the presentation of more private capital to come in and take the risk in pennsylvania? >> that's my hope. that's why i'm here supporting it, because i'd like to see the private market grow and i'd like to see consumers have more options rchltd and if the private market does grow and they're assessing the risk based on their models and what they believe is appropriate in risk-based analysis, you feel there may also be an opportunity then these private carriers may not only offer the flood but

include an all perils policy, since they have managing the risk? >> i think that's right, and would that not lead to an opportunity where we may have even more people, and assuming other insurance commissioners across the country do as you do, to include more people to want to participate in flood insurance because the private carrier can offer it to them at a lower price? >> that's the hope. >> and would that not lead to an opportunity, as mr. birnbaum says, where you would see more and more policies include in their all perils flood? but to keep it the way it is now where we bifurcate nfip against an all perils policy is not going to help the situation. would you ay glee? agree? >> yes. >> and i've enjoyed listening to mr. birnbaum, i agree with him and i think you will, too, as when he states in his testimony consumer protections provided by the states are far greater than those that exist for nfip insurance. would you agree? >> yes. >> and have you had any problems -- let me put it this

way. do you feel comfortable continuing to allow surplus lines carriers to write flood insurance in the state of pennsylvania? >> absolutely. >> thank you. mr. kelley, surplus lines don't just write flood insurance, do they? >> they just don't write flood insurance. i appreciate that question. you know, we've heard here that surplus lines are not regulated, not licensed. >> correct, and if you would discuss those. >> simply in correct. every surplus lines insurer is licensed in a state. it may not be licensed in every state, but to be eligible to write surplus lines insurance, as commissioner miller described, you have to be licensed in your state of domicile. so the regulation of that insurer from the financial solvency, from a market conduct perspective, none of that varies between the standard market and the surplus lines market. >> and surplus lines are currently writing flood insurance policies now? >> absolutely. and here's why -- not just because of the bigger waters act, but because for decades

you've had consumers whose solutions weren't solved by the limtsds of the nfip or didn't have a state of market action. >> so under the law they can right policies and is the number of policies growing over time? in flood insurance? i mean i doubt significantly, but is it growing? >> you know, it's not significant. you've seen the stats in my testimony and i'll just recap them here. we've got about six states, some of the biggest states, that capture flood insurance data. and those six states, which represent about 50% of our s surpl surpl surplus -- >> my time is limited. would hr-9021 consolidate for consumers buying flood? >> yes it would. >> thank you. we talked about -- mitigation yesterday. and i think the overall goal of a flood insurance policy, as in

any insurance policy, is to have the minimization of risk with the benefit of an affordable policy. if you don't focus on that what you're providing is relief. relief is not where we want to go, that raets fema and problems without any control. so what benefit is there in making sure that we allow for incentives to mitigate the risk, and what benefit is being provided or incentive is being provided right now by nfip for that mitigation? anybody want to take a stab at that? >> sure. so the, the key incentive for loss mitigation is proper pricing of the insurance product. >> correct, mr. birnbaum and i apologize. you're on something i want to talk about and i only have a couple seconds. would not consumers benefit from having more assessment of risk done in a granular fashion if involved making sure they're protecting investment on risk to the benefit of the consumers so we could have a more -- an

affordable market with a less risk of loss to the consumer? >> the answer to that is, yes, if it were comprehensively done by the private market. if you do just selective with the cherry picking h rsh-21, majorities don't. >> clearly i suggest it creates to be the market of last resort i think is what the panelists would like to see in the overall equation. thank you, my time's expired. i recognize pennsylvania for five minutes. >> thank you. ms. miller, i'm going to talk a little about the surplus lines insurers. you mentioned in your testimony that there is a growing appetite in the surplus lines market to provide private flood insurance coverage and that pennsylvania

has had some success with surplus lines carriers offering flood insurance. taking a national perspective, do you feel comfortable with surplus lines carriers writing private flood policies? >> congressman, i do. and, in fact, in pennsylvania, one of the things we're trying to do as a department right now is figure how we can do a better job of letting consumers know that this option exists. that's how comfortable i am with surplus lines policies. >> can you talk a little bit about the regulation of the surplus lines insurers? how do state insurance regulators monitor the financial health of surplus lines insurers? >> absolutely. as mr. kelley indicated, surplus lines carriers are licensed in the state of their domicile. so in that state they are meeting the capital and surplus requirements that had at mitted carriers are meeting, and so even though we talked about earlier the fact that the guarantee fund doesn't apply to surplus lines, there is financial monitoring of surplus

lines carriers, and even in non-dom zileri states there are capital and surplus requirements on surplus lines carriers, as well as carriers who are not domiciled in the u.s. so i'm comfortable we have a lot of financial regulation protection. but also we have, in a state like pennsylvania, if we have a surplus lines carrier that is not domiciled in pennsylvania, we still have authority over the placement of that insurance with the surplus lines' broker and the opportunity to go after that broker, if there's misconduct. but we also have i think -- >> what kind of misconduct are you talking about? >> if they, for example, in pennsylvania we have a requirement that they notify policyholders that, for example, the guaranteed fund doesn't apply. if they misrepresent the policy somehow. so -- or if they place the policy with a non-admitted, or a non-eligible surplus lines carrier, we can go after that --

>> these are bake consumer protection items that you're talking about? >> exactly. exactly. we can also -- we also enforce the requirement related to the eligibility of surplus lines carriers to operate and sell policies in our state. so if we have concerns about the financial soundness of a surplus lines carrier, if they're not paying policies, or i'm sorry. not paying claims timely, or if they're willfully violating our laws we can declare them ineligible to sell policies in our state. additionally, in pennsylvania we have what's called the unfair insurance practices act. i think it's, states have similar laws that are probably titled a little differently. these, again, are consumer protection statutes. they make sure that claims are paid appropriately, and that the insurer and the broker are not misrepresenting policies. and what's covered. and this act applies to surplus lines carriers just like it applies to admitted carriers. >> great. mr. birnbaum, you expressed concerns in your written

testimony about the level of regulation. -- sets the table for more problems for consumers who purchased the surplus lines policy when an event occurs. i point out commissioner miller from my home state points out at least five carriers sold in pennsylvania writing around 1,000 policies and the state closely monitors surplus lines business. what evidence do you have to show that state insurance commissioners or state regulators have not protected consumers particularly with policies sold to non-admitted carrrs via surplus lines? >> sure. so with admitted carriers, regulators -- >> what evidence? i'm looking for what eford you have where you can show me where this has been an issue. >> the evidence is that regulators don't have authority to approve forms or rates. commissioner issued a bulletin on price optimization telling insurers if they can't use a

consumer's willingness to pay to determine the price that they charge the consumer. she has no authority do the thing for surplus lines insurers and the same with rate issues and other policy form issues. a surplus lines insurer could include a provision in the policy. >> you're saying, could, could, could. i'm looking for evidence from you. >> well, the evidence, i'll give you evidence from the force placed insurance market. the largest writers of private flood insurance today are forced placed flood insurers, and the largest of those are admitted carriers. so private flood insurance can be written by an admitted carrier, but there have been issues where those private flood insurers, when they were using surplus lines were charging exorbitant rates than providing the insurance. that's been reined in, in part because the federal housing finance authority and some state regulators have said you need to

move that forced place flood from surlus lines to the admitted market. >> state regulators have the authority to go after them? would state regulators have the authority, under existing -- >> they have authority basically for financial condition, but they don't have the same authority as they do over admitted carriers for things like policy forms and rates. if there was such great consumer protection in the surplus lines, why doesn't pennsylvania or every other state allow all personal auto and all homeowners to be written in the surplus lines market? why do they require that to be admitted in the admitted market? there are more consumer protections in this market. >> ms. miller, would you care to respond to that? >> sure. so surplus line, the way it works is, surplus lines are for unique risk. that's why we have admitted carriers that, that write the rest of personal lines policies, because we have laws in all of states about diligent search requirements and if you can buy a policy through the admitted market, then that's what you do.

it's really surplus lines is for those unique risks that aren't written by the admit the market. >> i yield back, mr. chairman. >> gentleman's time expired. chair recognizes the gentleman from kentucky for five minutes. >> well, i think mr. ross, i thank mr. ross for his leadership trying to tackle this complex issue. mr. murphy as well. thank you for your efforts in trying to deal with what is clearly a very complicated issue and a huge potential liability for taxpayers and affordability for a lot of my constituents in rural and central and eastern kentucky. i appreciate what 2901 is trying to do in terns of clarifying that state insurance regulators have the authority to regulate private flood insurance, clarifying the definition of private flood insurance, but i want to have the, ms. miller, mr. bradshaw and mr. kelley actually address a point that mr. birnbaum is making, which i think is a pretty interesting

and good point, and that is that there is this impediment to private insurance offering flood coverage based on just the simple fact that they have to compete with the subs sdised rates of the nip. even if 2901 does move us in the right direction in these areas what do we fundamentally do -- what do we do about this fundamental problem? about the competition with subsidized rates? >> i think that's a challenge. and i think in terms of the, the future of nfip, at the neic we will be embarking this year, i know the reauthorization is coming up next year and it sounds like there's a lot of interest in talking about ways to modify that program. we've not had conversations at potential recommendations for changes to that program, but i'm -- it was just announced that i'm chair of the property and casualty neic committee and i can tell you this is on our agenda this year. we're going to look at this and

putting together kind of our recommendations for ways that perhaps nfip could be modified going forward. from my perspective today, i'm here because i just want to see consumers have more options, and if i believe 2901 will provide for -- for more private market options for folks, and i think that will be a good thing for consumers. >> yes, sir? >> yes. with the -- with regards to the affordability of the program, however this comes out, is we're very interested in making sure that the consumer can afford the product. i believe that the competition will bear that true. we have a unique position in louisiana where we have such a high concentration of flood risk, very much of it is required. numerous of our customers are required to have flood insurance, and so the impact on, by nfip in a huge change in the

premium not only affects our consumers but the property values and so which we have a high level of interest in, because at the end of the day, we're the guys that be protecting the investors. so we're very interested in that. we would see it that it's somewhat like the relationship with fha in the general market of lenders, and of guarantee orrs in the mortgage business is that fha has a rule. looking back to the '88s, late '80s of the oil bust was that fha was the only program in town. so the nfip does serve a significant and a long-term benefit. >> thank you. as we move to mr. kelley, if you could answer just two specific questions, as we, in response to mr. birnbaum's testimony. in your view as an advocate of 2901, what is preferable about ross murphy to the tria model

mr. birnbaum is advocating? what is preferable to the surplus line solution to the tr model mr. birnbaum is advocating and secondly, can you confirm mr. birnbaum the contention that 2901 would give surplus lines insurers the ability to cherry pick nfip policies that are overpriced and the low risk making the nfip more financially vulnerable? i'm really interested to hear your thoughts on that. >> thank you for that question. with respect to the tr triia mo. tria mandated it offer coverage giving the private market the opportunity to get in and figure it out invest in underwriting processes and get the experience to develop products. many standard companies i think over time will probably add flood to the standard homeowners

policy like we've talked about here. it's just going to take time. i think it will happen, it's just going to take time and much of that experience will transfer out of what the transfer lines market is able to do. second question? >> the issue of cherry picking. >> issue of cherry picking. you know, the issues you're trying to balance here are affordability, availability, financial stability of flood insurance. terms like cherry picking, adverse selection, they obviously have very negative pious referring to private companies and their business decisions based on sound financial models, actuarial data, capacity, risk appetite and experience. the privs markets financial stability is in all of our especially the consumer's best interests. making decisions about the types of risk to write, regions to write in, capacity to allocate to those regions, those are essential elements to maintaining a solvent, viable marketplace. so regardless of which risk you transfer from the public to private balance sheet, this

starts to transfer some of them, and reduces the long-term xpoesh herb to the subsidized federal government. >> i yield back. >> gentleman's time expired. go to the gentleman from texas, mr. williams for five minutes. >> thank you chairman and thank all of you for your witness' participation today. mr. birnbaum, you heard i'm from texas. and your testimony you specifically state that private insurers can offer flood insurance and can do so more efficiently and effectively in the nfip. now, i'm going to agree with you 100% on that, and i believe the federal government has gotten way over its head on this issue, like it does with a lot of things. but you also state that hr-2901, which i am a co-sponsor and proud to be one, will not address the longer term problems of the nfip, will not promote private market participation in the sale of flood insurance, will create bigger problems in the future when flood events occur and eliminate state regulatory oversight. so three questions.

number one, how did hr-2901 totally eliminate state regulatory oversight? >> hr-2901 removes from bigger waters the limitation that private flood insurance can be written by surplus lines for commercial policies. it opens the door to surplus lines for residential flood insurance. by doing so, it means that private flood insurance basically moves out of the admitted market, where there are far more consumer protections than in the surplus lines market. so that's the basis for that assertion. >> number two, what's your assessment of the state reg la story system in light of your statement on page 19, meaning do you have a lack of faith in the state regulatory process? >> no. i'm a strong is a porte of state-based regulation. it hasn't been an unqualified success over the years, but i'm

a strong supporter of it and i demonstrate that strong support by saying that flood by being part of the standard homeowners and commercial property insurance then becomes the responsibility of state insurance regulators. what hr-2901 does is continues this rube goldberg apparatus of, you know, constricting the nfip, giving them all sorts of requirements and constraints giving the state-based regulators certain responsibilities but the overall thing makes no sense. if you want to get to a sustainable future, then you utilize the private market but give them the full responsibility overseen by state-based regulation. don't include this, this nfip that is required to provide sort of subsidized insurance, which gives the private sector then the opportunity to say, well, we're only going to take this most profitable business. we're going it leave the more risky and the less profitable

business to the federal government. so your privatizing prompt and socializing the risk. this is -- that is exactly the thing that is outraging people all over the country. it's the type of crony capitalism that basically says, look, we're going to give one group of people, you know, the government advantage instead of trying to create a level playing field for everyone. >> how would the state regulation of flood insurance differ from the state regulatory process for homeowners or other insurance lines? >> well, right now for surplus lines, what commissioner miller and others have said is, they regulate the financial condition of the surplus lines insurer, and they have some ability to regulate sort of marketplace misconduct. but they don't have the ability to insure the policy forms are not misleading or deceptive. they don't have the ability to ensure that rates are not unfairly discriminatory. and more important, they don't have the ability to make sure

that the nfip meets its goals. you know? so you have federal requirements for flood insurance and you're essentially delegating part of the insurer for doing that to state regulators. i'm a big supporter of state regulation, there have been notable failures. private mortgage insurers we saw in the insurance collapse, private mortgage insurers faileded. under the purview of state-based insurance regulators. we're not talking about a pristine record but i have faith based insurance regulation if you give them the comprehensival too doss to it not the piecemeal of 2901. >> i'm a private sector guy in the retail business and i can tell you counties in texas i represent have had a lot of flood problems. the way to get it right, turn it over to the private consumer.

not the government. prices will be rights, service will be better and i'm happy to be on hr-2901. mr. chairman, i yield back my time. >> gentleman yields back. with that the general lady in new york is recognized for five minutes. >> thank you, mr. chairman. i'm sorry i wasn't here to listen to your testimony, but i was in a markup of -- in the small business committee. we just finished, but i want to thank you all for being here. and i have just one question to mr. bradshaw. my district in new york city, which encompasses communities on new york city's lower east side and red hook were especially hard hit by super storm sandy. in a january 2014 report published by the gao, some

stakeholders noted that the rate increases associated with private sector flood insurance could lower a home's market value. have stakeholders also expressed concern that whole communities with a high risk of floating, like those in my district, could become economically unbuyable if increase in premium rates makes flood insurance on r unaffordable for too many residents. mr. president bradshaw, how do we insure premium rates on flood insurance do not rise to such a level that it causing home ownership rates to decline, particularly in vulnerable communities? >> certainly we've had some similar experience with hurricane katrina, and our part of the country and the gulf coast is very much at risk, just

as you, and certainly taking nothing away from the flooding that's taken place on the mississippi river and missouri right now as well, people are in harm's way. we look to committees such as this to make sure that those folks that need help in order to maintain their property values, in order to continue to make a living, to continue to have access to home ownership and that from that perspective, there seems to me to be a parallel between what fha does in the home mortgage business and what nfip does into the flood business. there are, in our part of the country, port fusho no, one example. carries from the gulf to the mainland. there are reasons that that has

to be there. people have to work there. so that very well may require some subs sedation for people of a premium in that area. it's very important. i'm not sure i know how to do that. what we have now has created $23 billion in debt and if we fail to plan for the next event, if there is an event, then we will merely reexperience what we have today. so we're very eager to help protect the consumer. we're very eager to be very -- interested, and verbal, to help protect the consumer, because without them, then our business goes away. >> thank you. >> general lady yields back. with that we go to the gentleman from texas, mr. green.

recognize you for five minutes. >> thank you very much, mr. chairman and i thank the witnesses anden of course always thank the ranki ining member fo leading in thighs issues. i lived through katrina and it's inappropriate to say i lived through it because i wasn't actually there. excuse me. this may be the president calling. i wasn't actually there. it's not the president. okay. so i won't take the call. i wasn't actually there, but i arrived shortly thereafter, and i saw the tragedy that was left behind. i went to sri lanka after the tsunami. i was in the philippines after haiyan, and i know what this looks like, the aftermath. and it's not a pleasant sight to say the very least and i'm being quite euphemistic.

here is the question that i have for you, dear friends. are you indicating that if we had this system in place pursuant to 2901, that we would not have expended the billions of dollars that we had to expend after katrina? that this would eliminate the necessity for the federal govnment to step in? it's an important question for me and my constituents. yes, sir, if you would. >> so the answer to that is, 2901 would not have prevented any of the problems that you just described. because 2901 would continue to leave the nfip with those policies in high risk areas. they would continue to have the nfip charging inadequate rates. it would continue to have subsidies for people who don't need them. so you'd still have the same problem you would today, and as a matter of fact, it would be

worse, because the nfip instead of broadly averaging its rates and getting revenue for policies in lower risk areas, it wouldn't even have had that revenue. so the situation would be worse today if 2901 had been in place. in our proposal of having the private sector provide the flood insurance, then the $23 billion would not be there today, if our system had been in place. >> on the question of the -- the billions that we currently finde the treasury, would -- would we still have that $23 billion dollar debt if we had 2901 in place? . >> well, yes. the $23 billion is not going to go away under existing situation and it's certainly not going to go away under 2901. it's going to get worse under

2901, because the private sector is going to take the most profitable of the policies, remember i told you earlier that the nfip puts things into 30 risk categories with 1 being the lowest risk. 30 being the highest are and averaging that? the private sector will come in and take 1 through 14. leaving the nfip with 13 through 30. the most risk. so the nfip will have almost just the same risk but much less reven revenue. so the situation will get worst for the nfip and let the private sector cherry pick the mst profitable policies that are out there. what's needed is to give the private secretariy the responsibility to handle the entire problem, which is price all of the policies. there's always going to be an issue with affordability. right? there's just no way about it, but you can't have affordability addressed through the insurance pricing system. when you under price insurance you create incentives for people

to invest badly. you invest in areas where it's not sustainable. it's critical to have risk-based pricing. it's also critical to have financial assistance delivered in the form of loss mitigation. instead of giving people a grant to pay for the insurance, give them money to mitigate their homes so that they're less exposed to flood. reduce the cost of flood insurance by reducing the exposure. that's where the target of federal expenditure should be. the delivery of the insurance should be in the private sector. >> thank you. i will yield back the balance of nigh time. my time. >> yields back. with that, the gentleman of florida, in murphy, recognized for five minutes. >> thank you, mr. chairman. i thank you ranking member cleaver for today's hearing, thank you member waters for your leadership and mr. ross who's now left. thank him as well for his cooperation working in a bipartisan manner to make some progress here and i very much

appreciate the input of all the panelists today. the witnesses for this important discussion hearing all your kaunlts all your thoughts and bottom line is, how can we provide more affordable flood insurance options for people all across the country? you know, this legislation we're discussing, the flood insurance market parody modernization act which i've sponsored with my good friend and fellow floridian mr. ross aims to do just that. this act would provide more choice, greater competition, and less cost in the flood insurance market. it would excelerate the development of more flood insurance options by allowing policies accepted by the state to satisfy mandatory coverage requirements under the nfip. when congress passed the national flood insurance act, its intention was that insurance companies would provide flood insurance coverage for the american people, and when the legislation that was recently updated under the big ert-waters

reform act of 2012, that intention was, in fact, reaffirmed. however, due to the, i'd say lack of legal clarity on the particulars of the insurance policies, allowed into the program, most lenders have not accepted private flood insurance to meet mandatory coverage requirements. this bill would solve this problem by providing a simple and clear definition of private flood insurance under the program consistent with the successful regulation of other forms of insurance in the marketplace. you know, that which is issued by insurance companies, licensed, admitted or otherwise approved to engage in the business of insurance in the state in which the property is located. i believe there are always about need for the nfip presuogram, b there's more than enough risk in flood that can be written by private insurers willing to do so, whose capability will not

only continue to advance with the growth of new technology and modeling. you know, insures access to private flood insurance choices will help reduce the risks to which taxpayers are exposed under the federal program, and especially because flood insurance coverage is mandatory in many areas, customers need more competition and options in the flood market to make it more affordable. so i ask that my colleagues on both sides of the aisle support this legislation to give our people, our constituents more choice, greater competition and ultimately less cost which it comes to flood insurance. i 0 came to congress as did most of us here to work with everyone no matter the party affiliation and solve problems. i think this legislation is one example of an area we can actually make some progress in this last year of this administration, and i urge my colleagues to do so. in my remaining time, a question for mr. kelley. you know, one of the topics of

discussion we had in this, you know, conversation, you know, writing this legislation, dealt with surplus lines and their role in this. approximately how many surplus lines, if you know off the top of your head, flood insurance policies in florida have been accepted for the purposes of nfip mandatory purchase? >> you know, i've got the florida data here somewhere. i've got it combined with six states, actually. in 2014, 134.1 million dollars worth of flood insurance premium written in those six big states. florida, california, texas, new york. 32.9 million of that, 24% of that covers residential property, and of that category, only about 29% represents primary coverage. the balance being excess coverage on a personal residence. so it's still a relatively small share of the overall surplus lines market.

it's less than 1% of the $40 billion market nationwide. >> okay. mr. birnbaum, your opinion. how does this differ from homeowners insurance? both seem to be intended for the same thing. where that's protecting the loan in an event of a disaster. how do you see the difference? >> i don't. that's why our proposal is to require that the homeowners insurance policy cover the peril of flood. that would deliver that coverage far more efficiently than through the requirement of a second policy. it would mean that everybody gets the coverage that they expect, and pay their fair share for that coverage then under the current system. and private flood is already being provided by the admitted market to a greater extent than the surplus lines market, as i mentioned earlier, force placed flood, there's more forced place flood wruten by admitted

carriers than the surplus lines numbers that mr. kelley described. so it's not as if it's unfeasible for admitted carriers to write flood. it's fecesable. feasible. the question is what's the best way to nudge the appreciate market into this? and in my view the best way is to rirp t require the coverage of flood in them to homeowners and commercial property owners. that accomplishes a variety of things including problems with the nfip as well as fairness issues and promoting loss mitigation. the problem with respect, the problem with 2901 is that it addresses a very narrow issue that can create problems in other areas of the flood program. >> thank you. >> gentleman's time is expired. we're going to go for a second round. i think everybody has maybe one or two questions so shouldn't be too long. we have votes coming up here shortly. with that we go to the gentleman from kentucky, recognized for five minutes. >> thank you, mr. chairman and just to follow-up on an issue.

there's a pretty good consensus here we need a, incentivize for private participation in flood insurance, obviously, but beyond the ross murphy approach to bring in more surplus lines, companies that write nfip policies currently have to sign this non-compete clause, which pushes these companies to the sidelines inners it of developing an offering private flood insurance policies. for any of the witnesses that are interested in this, would you support language in hr 2901 or other legislation that would eliminate this non-compete clause that's currently required by fema? >> so the answer to the question is -- you can't eliminate the non-compete clause without doing anything else. because if you eliminate the non-compete clause then you have a situation where the company is

selling policies for fema, and also selling its own flood policies. so what the company will do is, make its evaluation of what the riskiest policies are. give those to fema. the most profitable ones or least risky, and keep those. what you have is essentially adverse selection so there's a reason why there's a non-compete clause. that's an example of, well, we'll try to address one narrow issue without looking at the broader problem. you really need a comprehensive approach and the comprehensive approach is, the private market provides flood as part of the -- the residential and commercial property insurance subject to the standard state-based regulation. the nfip transforms to a catastrophic reinsurer role, and that enables all of the players to participate. private markets. the state-based regulators. alternative capital, and it puts the federal government in a role

of focusing on lost mitigation which is the long-term solution to addressing flood problems. >> i love mr. kelley to respond, but it seems like in advocati t this cherry picking issue but still a federal backstop in either model. i'm wondering which is the better model? mr. kelley? >> just respond to the write your own prohibition. i agree with your point, congressman. one barrier we're seeing to the standard mark stepping in. if already involved in the write your own they can't offer their own stand-alone program. we haven't taken an association position. that's not an issue we've focused on but it's clearly a barrier i think would get more state carriers involved if it weren't there. >> do you have any thoughts? >> congressman, we also are in the same position. the neic hasn't taken a look at

this. as we look at the nfip program and recommendations we would make to modify the program, this is something we'd look at but it's an interesting issue to look at. from our perspective, 2901 would be a great first step to, and if we could do that quickly, then i think having the conversation about changes to nfip would make a lot of sense as well. >> one thing. let me follow-up with one final question. you know, mr. birnbaum is making the argument that, that the ross delany -- or ross-murphy little would actually exacerbate the financial solvency problems of the nfip. we a you agree we don't want it in more financial distress than it already is. so as advocates of the ross-murphy approach, do any of you all, ms. miller, mr. bradshaw, mr. kelley, want to address that issue?

>> i'd be happy to. you know, i think the issue of cherry picking is certainly a concern, and something that we would recommend we monitor going forward. but right now as i've said a few times. i mean, this market is very small. there's just too little data i think at this point to know how the market's going to react going forward. from our perspective, if this bill will enacted sooner rather than later, i think it would give us a chance to get more data and really observe how this market is going to perform going forward. and i think that does a couple things. i think, one, it gives us, all of us looking at the nfip program it will give us more information to inform potential changes to that program, but, also from a state regulator's perspective, i think if we had more data, it would help us as we look forward and think about ways we might need to change our regulation to address this evolving market. so -- but from our perspective,

i certainly wouldn't want concerns about cherry picking to get in the way of us providing more options for consumers in this market. >> mr. kelley? >> i think back to that 1% category of properties. you know, we got to admit, no one the lining up to write those right away. and the thought of actually adding those types of coverages at a flood peril to that homeowner's general homeowner's policy, that's going to price them out of their home. in our opinion. so if we can focus on at least shifting some of the burden out of the program, you at least reduce the overall risk. that leaves you with then the category of the highest risk properties that perhaps are residual market is there to figure out, and in our mind it would allow the nfip, then, to focus on what do you do about mitigating that risk? about appreciapreventing flood n those areas? >> i need to jump in quickly and say, it's absolutely crystal clear that this bill would allow

surplus lines and encourage surplus lines and insurers to cherry pick. it's obvious as the nose on your face. the only policies that the surplus lines writers would do are the ones that they view as profitable. the nfip has a variety of policies ranging from less profitable to more profitable, and what will happen is, they'll be left with the less profitable policies, the highest risk policies, and less revenue to do it. there is no question this bill will lead to greater financial problems for the nfip. and i'm really surprised that the other panelists are not acknowledging that. >> gentleman's time expired. with that we go to the ranking member, gentleman from missouri mr. cleaver for follow-ups. >> thank you, mr. chairman. again, before we close out i want to thank you for the vision of trying to get this done much earlier than we normally try to

get critical legislation through. i just have one question. and -- you know, my son's in school outside of los angeles and i go out and see all of these houses built, you know, on cliffs. like, i dare you to rain and -- and wash my house down the cliff, and i'm -- because i'm on this committee i'm always angry driving through there, and saying little words as i drive. but -- those are usually wealthy people. the chairman and i, and ms. waters, we -- we were in the ninth ward just a few months ago, and ranking member waters and i were there just a few weeks after katrina. my son, i have a son in college down there at the time.

and it was just decimated, and -- the actor from missouri, brad pitt, raised a lot of money and they've rebuilt the ninth ward. most of the houses are now on stilts, but the people are still there, and these are not rich people. these are poor people. that ward was, and still remains, a low-income ward, although people, you know, they go to work every day. so do we expect-would any of you believe that it's practical to expect that poor residents, low-income residents, could actually pay the full risk rate for private insurance? or do they get left out? >> so -- the answer to that is, they can't pay the full risk rate if there's no lost

mitigation. if they're in a high-risk area and paying the full-risk rate, then, no, they're not going to be able to afford it, but they wouldn't be able to afford a r surplus lines policy either. the question is, where do you want to spend your federal dollars? you spend your federal dollars to subsidize that policy or spend your federal dollars on lost mitigation that reduces the exposure for that homeowner and thereby reduces the premium? if you simply subs sdis the rate you set the table for future claims, repetitive claims. if you spend the federal dollars instead as a loss in mitigation, reduce the exposure, reduce claims down the road and reduce the disaster relief. so the model has got to be, let's spend federal dollars on lost mitigation as a way to make the insurance more affordable. instead of subsidizing the rates.

that's not a long-term solution. subsidy is not a long-term solution. loss mitigation investments are. >> that would be a fema issue and not necessarily one that we would have to deal with, the mitigation issue. >> they go together, congressman. you can't tell the nfip to offer subsidized rates and then say, invest in lost mitigation. >> well, they do in the real world, but this ain't the real world. i mean, i would like for it to be, but that's just not the way it is. i mean, i understand exactly what you say, and i agree with what you are saying, if we were in the real world. >> you have the power to create that real world. >> thank you. >> mr. bradshaw? >> very quickly, as you know, congressman, there's been a huge investment in the levee system in new orleans, which we appreciate significantly. there's a huge modernization of

the levee system in new orleans. so when you live behind a dam, you have to be always conscious and always vigilant in the daniel starts leaking. so the -- the national flood insurance program is very important program in order to help those folks that do need help to maintain affordable housing. we're very -- very much in favor of that. >> thank you. >> gentleman yields back. i have a couple follow-ups. mr. kelley, you know, during the course of discussion you indicated that we got 1% of the policyholders, create 30% of the loss. mr. birnbaum's been talking about those guys, and how do you adequately rate those folks? how do you fund them?

how do you not fund them? his suggestion is you, through mitigation, take that 1% and reduce it down to as much as you can, i guess. so my questions is, do you believe -- today we're talking about how we can shift from what we have now to a more private market solution. do you believe that if you take that 1% out, the other 99% of the policies can actuarily be structured toe that those 99% can afford the coverage and take care of that other 70% of the risk? >> i wish i could answer that question. i'm not the actuary in the room. there's a large percentage that you can, i think. what percentage, i can't quote you. >> because it would seem to me that that would be a key point. because if you have 1% causing 30% of the problem, that's the group that's your headaches, where your risk is. if you can take the other 70% of the risk and divide it among the

99% of the policyholders, it would appear to be you'd be able to find a way to fund this that would be affordable. so my next question would be -- as someone who represents the industry, and sees opportunity, what -- how long do you think it would take for the market to transition from where we are to where they'd be willing to take this 99% of the policyholder risk on? >> let me start by saying it's going to take that transition to figure out how much of the 99% can transition, but that's going to take some time. >> we have a transition period. but how long would it take? number one is there a willingness within your -- your companies and the capacity to take this on in a two-year, five-year, ten-year, 20-year window? what would you anticipate being something that would be reasonable for the companies to be able to do their due diligence, get their mapping

correct, models correct, so they could see where they could come in, make it a part of the homeowners' policy, as mr. birnbaum suggested which i quite frankly like. how long do you think it would take? one of the concerns we have as a committee, if we're going to try to go from here to there we need an idea of timewise and the testimony today it's very important to be able to do that. i won't hold to you it but it gives us a guideline to begin discussions. >> there's capacity already there. the commissioner already testified, most of what we see transition out of nfip is to surplus lines carriers now. so there is capital there. there's a lot of capital in surplus lines, but long term, our model, we wouldn't expect that that business would stay in surplus lines for a very long time. many types of coverages evolve out of surplus lines into the standard market. that's how the model works, how the market should work. >> you're saying eventually go into mr. birnbaum's model of being a part of the homeowners

policy itself? >> i think eventually. doing their own investment in modeling and expertise with the rufk, many of them will add that peril to the standard homeowners policies, i think. it's that time between now and then that our market acts as the residual market. >> let me yield to the -- >> thanks forral panel. we were following some of yours back in the office. just to play off of your points. so i'll throw it out to mr. kelley and in some sense putting you on the spot trying to be the actuary in the room. what do they say about actuary? being a cpa was too exciting? something like that. so, in any event. so the question you posed is what, you did it with 1%, 99% what would the situation look like? your answer, couldn't exactly say for they're, but i'm guessing that if you did it that

way, that for the 99%, anybody else can chime in. i'm guessing for the 99%, it would be a more favorable ratings structure for them than it is right now. right? so i mean -- in new jersey, if i'm -- i'm not. but if i'm in that 99% right now, after last go-round with the maps and what have you, i'm seeing my rates go so high i'm having to sell my place. i think that's what people in jersey are finding that, maybe. if you went to this 99 valuation, theoretically my premiums might be more reasonable? is that true or not? >> here are the facts. there are 5.2 million nfip policies and there's well over 1 million subsidized. and that's -- the exact number isn't noerch because there are a bunch of policies that not only are prefirmed subsidized also grandfathered subsidized. >> right. good point. >> so you're talking about 20 to

who knows what percent of the policies are subsidized. to suggest we take out of the 1%, somehow that all of a sudden it's become affordable for the 20 year, or the 30%, where it's currently subsidized. that's just not going to happen. you cannot yaafford affordabili strictly through -- always a situation some consumers can't afford a risk based price and you need assistance from outside the system. >> that gets to the second point of the question. because i get that, but then perhaps some of those people are living in areas that maybe are just -- not a risky, or overly risky place to be, and that has to be taken into consideration as well. but is there a difference -- does anybody think there would be a difference, go to that direction. 100% on 99% as far at mitigation? i heard before talk as mitigation. would there be a change in the

mitigation processes on the private sector verse the -- versus the public way we do it right now? >> oh, absolutely, congressman. >> for the better? >> yeah. if the private sector were responsible for flood insurance as part of the homeowners policy they'd have incentive for lost mitigation they simply don't have right now. >> okay. >> you would see things like partnerships for lost mitigation. you might see multiyear homeowners policies where the lost mitigation is financed way loan that's paid for from the discounts. there's opportunities for innovation that simply aren't going to occur saying let's hope the appreciate sector gets involved if the surplus lines puts its toes in the water. >> with that i'll yeed back. i'm over time actually. >> i'd like to respond. >> real quick response. we know experience 5% named storms deductibles and hazard insurance in our particular marketplace. so we continue to have that

risk, and as a lender, then part of that risk we accept. and that's tichicalypically wha seeing unless you buy down to 2% -- not flood insurance but the hazard insurance and not much lost mitigation on hurricanes. >> i thank the chair. >> i just as a follow-up comment, i think mr. birnbaum's point. if you wind up with the private insurers, trying to figure out what to do with the 1%, you can center that group saying if you do these things we will drop your premium and, therefore, you can have an impact in that way as well. it's a fascinating conversation we've had this morning and i want to thank all of the witnesses. you've answered a lot of the questions we've had, given food for thought. broadened our scope what we're trying to do and look to do, trying to see how we restructure the program. what we can do, what the private sector is willing to do, how different innovations can be a

part of this. regulatory wise. how this can be overseen to make sure that the consumers are protected, yet there's adequate provisions and policies to provide coverages that are real and meaningful. so thank all of you. without objection, all members have five legislative days in which to submit additional questions for the witnesses to the chair, forwarded to the witnesses for response and ask our witnesses to please respond as promptly as you're able. without objection, five days to submit extraneous materials for inclusion into the record. with that, hearing is adjourned.